Theme investing, like most other things, has its good and bad. If you’re choosing funds by looking at broad trends, there are some issues to look out for, according to Gregg Wolper of Morningstar.
“Managers who base their strategy on themes might pick correct trends but falter anyway because the companies they chose had shortcomings that limited their ability to benefit from favorable tailwinds,” he says. “For example, a few years ago many managers were buying big drug companies because the aging of populations would ostensibly make those firms indispensable. That didn’t work out well, for the most part.” Wolper recommends avoiding mainstream themes and looking closely at individual companies.